We reiterate our ‘overweight’ rating on HDFC and increase the price target to R1,125 (R1,010 earlier) as strong growth, strong balance sheet and average multiples imply a big upside potential. In our view, HDFC is in an enviable position.

Funding cost is falling while loan yields are holding up (base rate driven). This is causing spreads to expand while gaining market share. Topline is expected to grow at over 20% for the next few years, which should help multiples (at long-term average now) expand.

The stock is trading at 3.7x book and 18x earnings (on core basis) on FY14e. While this is not cheap on an absolute basis, it is not expensive given HDFC’s earnings and balance sheet profile. We expect multiples to expand well above average levels. Our new 12-month price target is driven by higher valuation for the parent and implies the stock will trade at 4.1x book and 19x P/E on FY15e.

Despite noise around competition over the last 12 months or so, individual AUM growth continues to be strong at 24% y-o-y with HDFC likely gaining market share. Unlike previous cycles, when banks competed on rates, this time they are unable to. As a result, HDFC is growing at almost 10 percentage points more than the system. We expect NII growth to top 20% for the next three years. NIM outlook is strong with falling funding costs. Also asset quality trends remain robust, with NPLs at 0.7%. In our view, the company is one of the best-capitalised institutions in India, with a Tier-I ratio of 13.8%.